South Dakota LLC Operating Agreement
Your operating agreement is the legal document that contains the rules and procedures for your South Dakota LLC. It is a legally binding contract between you and your members, formalizing important processes within your company, including voting, distributing profits, transferring membership interest, and dissolving the business, if that’s ever necessary.
Your operating agreement is an internal document, kept on file at your business location. You don’t need to file it with the South Dakota Secretary of State, but it is still an essential document for your LLC. Unless you’re a lawyer or a legal whiz, you may feel intimidated by the idea of creating an operating agreement on your own. That’s why we provide free, attorney-drafted operating agreement templates, customized for South Dakota LLCs.
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Why should a South Dakota LLC have an operating agreement?
A South Dakota LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.
According to SD Codified L § 47-34A-103 (2019), a South Dakota operating agreement “need not be in writing.” But any good lawyer will recommend documenting your LLC’s processes in a written operating agreement. Here’s why.
1. Your operating agreement proves you own your LLC.
In South Dakota, you can opt out of writing your members’ names and addresses on the Articles of Organization. This helps maintain your privacy, but it could make it tricky to prove that you actually own your business. Your operating agreement will have all members’ names and addresses listed, so you can show it to a bank, landlord, or potential investor as proof of ownership.
2. An operating agreement can help reinforce your limited liability status.
An LLC can only maintain its limited liability status if it can prove that there is legal separation between the LLC and its owners. LLCs take certain steps to demonstrate this separation, like opening a business bank account and keeping business spending separate from personal spending. Another important way to show that your LLC is a distinct legal entity is by outlining your LLC’s rules and protocols in a written operating agreement.
3. An operating agreement can help prevent disputes between members.
No matter how much you trust the people you go into business with, a disagreement may arise at some point. Having your initial verbal agreements in writing will help you resolve disagreements quickly and fairly.
4. An operating agreement can override South Dakota’s default laws.
Your operating agreement gives you greater control of your LLC. Without an operating agreement, your LLC will be governed by South Dakota’s default LLC laws. An operating agreement allows you to override these default laws and create your own rules for your LLC.
South Dakota Case Law
We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*
“Consider the case of Dysart v Dragpipe Saloon, LLC, where the members did have an operating agreement. However, rather than utilize the processes and remedies available under the operating agreement, certain members sought intervention into the LLC’s affairs through the courts. Unfortunately for all those involved in the extensive and expensive litigation, the Supreme Court ultimately weighed in and tossed out the case due to the members’ failure to use and follow the processes within their operating agreement for resolving the dispute among the members.
“The Dragpipe case is a prime example of why it is important not only to adopt and maintain an operating agreement, but also to read and understand the content and provisions of the operating agreement. For these reasons (and more), a reasonably prudent business owner would (and should) adopt and maintain an operating agreement.”
What is included in a South Dakota Operating Agreement?
Your operating agreement should address how your LLC will handle every important situation your LLC is likely to face—from how you’ll distribute profits to what you’ll do if the business falls apart. Technically, you can include anything in your operating agreement that isn’t forbidden by South Dakota law, but you should make sure you cover at least these topics:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Management
- Compensation
- Bookkeeping procedures
- Dissolution
Consult SD Codified L § 47-34A-103 (2019) to see what South Dakota law does not allow you to change in your operating agreement.
FAQs
Is an operating agreement required in South Dakota?
No. Per SD Codified L § 47-34A-103 (2019), a South Dakota LLC may adopt an operating agreement but is not required to. The law also says that an operating agreement “need not be in writing.” However, a strong written operating agreement allows you to override South Dakota’s default laws, open a business bank account, resolve disputes, and maintain limited liability status.
Do I have to file my operating agreement in South Dakota?
Nope. You don’t need to submit your operating agreement to the South Dakota Secretary of State. Your operating agreement is an internal document that you should keep on record at your business.
Does a single-member LLC need an operating agreement?
Yes. You might not see the point in signing an agreement with yourself, but a written operating agreement is crucial for single-member LLCs in several ways. You will need an operating agreement to open a company bank account. And if you’re ever sued, an operating agreement can help you maintain your limited liability. If you don’t have an operating agreement on file, there’s a chance that a court could view your single-member LLC as a sole proprietorship—a business type without limited liability protection.
*This is informational commentary, not advice. This information is intended strictly for informational purposes and does not constitute legal advice or a substitute for legal counsel. This information is not intended to create, nor does your receipt, viewing, or use of it constitute, an attorney-client relationship. More information is available in our Terms of Service.